What is title insurance and why do I need it?
What you’ll learn (TL;DR)
“Title” is the legal right to use or own property and title insurance protects you from legal challenges to your title.
Title insurance safeguards your property from hidden problems with your ownership, like fraud, missing owners, liens, or document errors.
Claims are uncommon because the title company reviews the property’s history and works to fix any problems before your closing. A large portion of the title insurance fee is paid for the work done to prevent claims.
Understanding Title Insurance
“Title” is the legal right to use or own property and title insurance protects you from legal challenges to your title. It’s different from homeowners insurance, which protects against future property damage that may be caused by an event like a storm or fire. Title insurance safeguards your property from hidden problems with your ownership that may be lurking in the property’s past. For example:
You may not legally own the property you paid for because of fraud.
Someone else may still have an ownership interest in your property because they never signed a deed to transfer the property. This could happen if your property was previously owned by a married couple, but one spouse did not sign the deed when the property was sold.
There may be liens
A lien is an interest in property for a debt that is owed. If the debt is not repaid, the creditor can force the sale of the property and apply the money from the sale to the debt. Mortgages, unpaid real estate taxes, and court judgments are examples of liens.
against your property, like unpaid taxes or a child support judgment against a prior owner of the property. Even if a lien is for the debt of a prior owner, the lien stays with the property until the debt is paid, becoming a problem for future owners. There could be document errors that affect your ability to sell in the future. For example, your deed may not have been properly notarized
Some title documents must be notarized, which means that a notary verifies the identity of the person signing the document. This is often done by looking at a photo ID, like a driver’s license.
or witnessed.
An owner’s title insurance policy covers 10 to 33 different title problems (depending on the policy type) that can impair your ownership. The policy also covers defense costs, which means that the title insurance company will pay for the legal fees to defend your title.
Risk of Title Insurance Claims
Though title insurance protects against several types of title issues, claims are uncommon because the title insurance process does most of its work upfront. Before you purchase property, a title examiner reviews the property’s history and works to fix any problems before your closing. A large portion of the title insurance fee is paid for the work done to prevent you from experiencing a claim. However, for those unlucky few who do face a title claim, the loss can be catastrophic without title insurance coverage.
An Example of Title Insurance in Action
In one real-life
example,
Lorie and Ronald purchased their home from a seller who bought the property at an auction after it was seized by the IRS for unpaid taxes. After moving in, Lorie and Ronald learned that the IRS canceled the sale and placed millions of dollars in tax liens
A lien is an interest in property for a debt that is owed. If the debt is not repaid, the creditor can force the sale of the property and apply the money from the sale to the debt. Mortgages, unpaid real estate taxes, and court judgments are examples of liens.
against their home. Luckily, Lorie and Ronald had title insurance and First American represented them in court- and won! The couple was able to keep their home without spending a dime of their own money.
“We were shocked when the sale was canceled. We had no idea why, and the only thing we were told was that there were liens on the property. So, we called First American. First American took care of the problem quickly and we're really happy about the way things turned out.” – Lorie and Ronald, Homeowners
The Importance of Title Insurance
While often overlooked, title insurance is essential, especially if your home is your largest asset. Not only does title insurance protect your property rights, it also gives you valuable peace of mind.